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Wednesday, August 21, 2013

Rewardsball -- Where HR Meets Moneyball

I'm sure that many of you read Michael Lewis' excellent book Moneyball. Whether you have or not, it's the true story of the Oakland Athletics baseball team with a focus on their General Manager, Billy Beane and his focus on the value that players actually deliver. It's the story of how a smaller-market baseball team without a lot of money uses its money wisely to be competitive without a lineup full of superstars. It's a story that instructs that certain statistics are undervalued and that certain other statistics are overvalued. It's a story that tells us how to efficiently use our payroll budget to achieve the best results.

That seems like a really cool idea. It seems so simple, doesn't it? All we have to do is to develop a simple set of metrics and apply them to our company and we will use our payroll more efficiently than our competitors, generate more profits for our shareholders and pay all of our employees commensurate with their contributions to our profitability.

Wow, John, that is a fantastic idea. You should start a business, preach this to the masses, make millions of dollars implementing it, go on the banquet circuit and eat lots of really bad chicken.

Not so fast.

Baseball is a relatively ideal forum for the concept of Moneyball. There are 30 teams. Each team has the same rules. Each team's goal is to win as many games as possible of 162. Each team wins games by scoring more runs than its opponent. Each team scores a run when a player safely crosses home plate. So, a player who generates a lot of runs for one team is highly likely to generate a similarly large number of runs for another team (if he is traded).

Tell me two companies that play by the same set of rules. That's tougher, isn't it? In order to have the same set of rules, they need to have similar goals. Perhaps they need to offer similar products and services. We could argue that they need to have similar financial situations, but we know that the Oakland Athletics and New York Yankees do not have similar financial situations. Yet, the Athletics with a payroll often dwarfed by what the Yankees pay their starting infield currently sit five games ahead of the Yankees.

Even McDonald's and Burger King, though, have different jobs. They have different products. They have different locations. Presumably, they have different goals.

But, let's take a different approach that can be applied to any company. Suppose a company currently spends $1 million per year on its health care benefits for employees (and their families). Perhaps $800,000 is the minimum that they could spend. What is the value of that additional $200,000? Does the company get a good return on its investment for the additional $200,000? If not, should they cut benefits or enhance them.

This is actually what I am referring to as Rewardsball although I think I can come up with a better name. It's an interesting concept, isn't it?

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